What does the chart show?

US equity markets have fallen under strong pressure recently, as expectations build that the Fed will unwind monetary stimulus measures quicker than expected. In fact, markets are now expecting the Fed to increase interest rates as much as four times this year, starting in March, to fight surging inflation. Higher interest rates raise borrowing costs for all businesses as well as making companies’ future earnings worth less in terms of discounted value. The effect is magnified for tech and other growth companies, whose earnings are further out in the future. 

The prospect of a faster pace of rate hikes sent US equities to their lowest levels so far this year. Coupled with concerns over the effect that the Omicron variant has had on economic activity as well as rising geopolitical tensions, the S&P 500 experienced its third consecutive weekly decline with tech shares and growth stocks being amongst the worst performing, which drove the NASDAQ and Russell 2000 down 13% and 11% YTD.  

Why is this important?

With the fiscal stimulus measures of the past few years disappearing into the rear-view mirror as we head into a rising rates cycle and a quantitative tightening environment, the backdrop isn’t particularly reassuring. During periods of volatility, markets can swing wildly as investors reduce risk and reposition their portfolios in light of changing news flow. Making rational, informed decisions during periods of heightened uncertainty is not an easy task, and fear can dominate in the short-term. A more prudent approach is to build additional diversification levers, which can reduce volatility and drawdowns, smoothing the investment journey – an approach that we promote and implement.